Date
25 March 2019
Ahead of Apple's March 25 media event, expectations are building up for some big announcements related to new content service offerings. Photo: Reuters
Ahead of Apple's March 25 media event, expectations are building up for some big announcements related to new content service offerings. Photo: Reuters

Why Apple seems to be regaining investors’ favor

After hitting a low of around US$142 in early January, Apple’s share price has been on a recovery path, currently changing hands at a little above US$180. The bounce came despite no positive news on the iPhone front, where sales continue to slow, and even amid talk that Apple is out of the 5G battle this year as it is yet to secure any 5G chips for its upcoming smartphone devices.

So, what explains the improved market sentiment toward the stock?

Well, the answer lies in this simple fact: Investors have begun to realize that Apple is ramping up efforts to reduce its reliance on the iPhone and retool its business for a new era in which services and subscriptions would be the principal revenue growth driver, rather than hardware.

An upcoming product event this month has served to bolster expectations that the tech giant will announce some initiatives in line with this strategy. 

On Monday, Apple issued media invites for an event to be held on March 25, along with the teaser “It’s show time”. While it gave no details, there is widespread speculation that the firm would unveil a new video and news subscription service during the event, alongside some new products such as the entry-level iPad, iPod Touch, Airpower wireless charging station or even an iPhone SE successor.

According to reports, Apple is set to announce its long-rumored TV streaming service and Apple News subscription services, focusing its keynote on the content side of the business.

The TV streaming service will mark a further push for the firm into digital content services, setting up Apple as a competitor to the likes of Netflix, Hulu and Amazon Prime.  

In line with the goal, Apple is investing in programming, including developing original TV shows, through partnerships with some studios and top celebrities.

If the plans are implemented successfully, it will result in the media offerings for Apple devices attain new scale, opening up new revenue streams.

Along with the streaming TV offering, Apple is expected to take the lid off the Apple News subscription service through an expanded news platform. 

The market chatter about a major initiative to boost content subscription services has helped breathe new life into Apple stock, but that alone doesn’t explain the long surge in Apple shares in the past two months.

Analysts have pointed out that it will take time for the new subscription services to make any significant contribution to the company’s financials, and that one can’t expect quick results given the intense competition in the market.

Apart from the services theme, what has helped shore up sentiment on Apple is talk that the company has managed to stabilize its orders situation. 

Bank of America Merrill Lynch has said in a new research report that it is now bullish on Apple over inventory reductions and stabilizing order cuts, as well as increased services penetration, a loyal user base and strong cash flows. It raised the rating on Apple to ‘buy’ from ‘neutral’ and lifted the target price to US$210 from US$180.

The stability of supply chain order cuts and large reversal of inventory overhang in iPhones should help ease the pressure on Apple after the cool market response to the smartphone launches last year, the US bank feels.

China is the key market to watch as Apple has allowed online platforms such as Tmall, Suning and JD.com to lower the selling price of iPhone XS series and iPhone XR by a thousand yuan or more per device.

The price cuts have helped iPhones draw big demand in the key market, according to reports. But banking on new customers will prove difficult in the long run, given the frenzied competition in the largely price-sensitive market.

That is why Apple is now laying emphasis on deriving more revenue from its loyal customers rather than tap new users, as the company cannot compete on price.

That brings us back to the service side of the business. With its loyal user base, Apple will do well if it manages to sell more content and subscriptions to its users.

To achieve this, the company needs to get the pricing right on the offerings such as TV streaming and Apple News subscriptions.

The March 25 event should signal a new attempt by Apple to transform itself from a hardware company and emerge as a service-driven entity. The launch of news and video subscription services on iOS platform will be a test on Apple fans loyalty, as existing iOS users have already subscribed a wide range of related services through App Store.

As Apple Music has attracted more than 50 million paid subscribers, it could serve as a benchmark as to whether Apple can extend its hardware advantage to the two new services.

– Contact us at [email protected]

RC

EJ Insight writer

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